Movie rental giant Netflix has just announced a totally new pricing structure. To the dismay of many of us netflix users, the price to stream + rent DVDs has almost doubled, from a price of $9.99 to $15.98. What does this mean for Netflix?
Netflix (NFLX) has been a stock darling for a while now, and the stock has skyrocketed over 400% in the past year and half. This topic has been beaten to death online, so I won’t dive into how many subscribers there are, or why the price ran so far, or why this stock is worth 83x earnings (where it currently sits at $291.27).
What I would like to talk about is moat, and how competition is only now beginning to take a toll on NFLX. Conservative investors know the value of an economic moat, and it’s pretty obvious that companies like 3M and McDonaldshave very strong ones. And it seemed, at least for a little while, that Netflix held a similar position.
For the past couple of years, Netflix was the only game in town. Blockbuster was all but dead, and except for those sidewalk RedBox’s, if you rented movies, you were a Netflix customer. Just look at their subscriber growth – from 6 million in 2006 to over 20 million today. It’s been nothing but blue skies for Reed Hastings.
But that could only last so long, especially in a young industry. Now, it’s time for the old guard to enter the business. Comcast is streaming shows from Fancast, and NBC has hulu-plus. Time Warner is going to start renting movies through facebook. We are transitioning from the initial excitement phase to the survival phase, were only a few winners will emerge.
If Netflix held the competitive advantage card, now would be the time to play it. But the rising consumer price proves that Netflix is worried. The companies the previously provided the content now want a piece of the rental action, and are dramatically increasing royalty fees. Some companies, like Sony, are already pulling out, effectively taking the middleman (NFLX) out of the game. Without producing it’s own content, NFLX is at the mercy of those that do, and many contracts will be ending in the next few years, leaving the negotiations open.
Some of the greatest companies out there don’t have this problem: you cannot take Coca-Cola out of the Coke game, or Phillip Morris out of the Marlboro game. You can’t work on Microsoft Word without Microsoft. But you can watch movies without Netflix.
While I am not invested in Netflix, nor do I plan to be, it reinforces in me some of my basic tenets of investing. If I were to own NFLX now, particularly if it was a large holding, I would be scared – will Netflix pull through? Will I wake up tomorrow $50,000 poorer? Without a dividend, I would live and die by those capital movements.
But as a dividend investor, I feel secure knowing that the companies I invest in have solid footing in their industry. And should the road ahead be bumpy, I know the dividend will still be paid, and most likely, raised. It’s times like these I am happy I’m a dividend investor.